What Are Your Credit Concerns?

Why your credit card rate just went up

The following article is from MSN Money.  I thought it was well  worth sharing with our readers. The article points out the importance of paying attention to your credit card bills and doing the right things to keep a good credit score. – Doug Parker

Why your credit card rate just went up
By MSN Money staff

Banks are increasingly pouncing on cardholders with any kind of chink in their credit report, a survey finds, with penalty rates of as much as 35%.

Imagine opening your credit card statement to find that your low, low rate has more than doubled, even though you’ve always paid your bills on time.

It happens, and it’s happening more and more frequently, says a consumer-watchdog group. Nearly half of banks surveyed by Consumer Action now penalize cardholders for changes in their credit history -- changes that can range from a late car payment to a mortgage inquiry -- with “universal default rates” of up to 35%.

Five years ago, the group says, almost no banks had such a policy.

The penalty makes carrying a card balance very, very expensive. The average card balance was $3,632 in 2004 (the last year for which figures were available), according to Carddata.com. The minimum payment -- typically 4% of the balance -- would be about $147 a month. Paying $147 a month, a cardholder with the average non-penalty rate of 12.61% would clear the debt in 29 months and pay $560 in interest. But at a penalty rate of 28%, you wouldn’t vanquish the debt for 38 months -- and you’d pay nearly $1,900 in interest.

"This is the only industry that re-prices something you have already paid for," said Linda Sherry of Consumer Action.

What trips their triggers
According to the Consumer Action survey, card issuers raised rates if any of the following occurred; the number that follows each item is the percentage of banks using such a trigger.
• Credit score gets worse: 90.48%
• Paying mortgage, car loan or other creditor late: 85.71%
• Going over credit limit: 57.14%
• Bouncing a payment check: 52.38%
• Too much debt: 42.86%
• Too much available credit: 33.33%
• Getting a new credit card: 33.33%
• Inquiring about a car loan or mortgage: 23.81%
Consumer Action’s yearly survey of the credit-card scene looked at 146 cards from 47 issuers. The group found default rates as high as 35% (Merrick Bank). Runners-up for the highest default rates are Citibank and Providian at 29.99%. The lowest default rate is 12% (Arkansas National Bank).

Some banks are willing to reduce the higher rates if cardholders’ credit histories improve, although not always to the original rate.

Opt out, lose the card
In many cases, the first time consumers learn of a rate increase is when they open their statements, because advance notice isn’t required. Several large banks such as Citibank, Chase and MBNA have announced their intentions to give cardholders advance notice of such interest-rate increases and allow cardholders to “opt out” of paying them. However, when consumers decline to accept the change, they lose use of the card.

“It’s nice to get a warning,” said Sherry, who coordinated the survey, “but for many folks, there is nothing they can do with the heads-up. They can’t afford to pay off the balance, and to transfer the balance to another credit card, they need a clean credit record.”

Sherry noted that people who reject the change of terms lose the use of their card, immediately or at the end of the expiration period, depending on the bank. “The opt-out protects you from the higher interest rate, but it’s unfair in any case to raise the interest rate on an existing balance.”

Should I cancel unused credit cards before applying for a loan?

At one time this strategy made sense and many people received this advice.  That’s because the only thing the potential lender could see was that you had a lot of credit available and that created concerns that you might not be able to manage additional credit especially for major purchase like homes and autos.  But that’s the way things worked  before FICO credit scoring came into play.  Today, you could actually hurt your credit score if you cancel or close unused credit lines or cards, at least in the near term.  For example, if you have a total outstanding balance of $5,000 on your credit cards and a $20,000 limit on all cards combined, you have a ratio of 25 percent debt to credit ($5,000 divided by $20,000) – generally considered by most lenders to be a healthy ratio.  Then if you cancel $10,000 of unused credit cards your ratio changes to 50 percent.  The new, higher ratio of credit used to credit available will cause your credit score to go down because it raises a red flag about your ability to manage debt.   

Is Credit Score Insurance Right For You?

Paying off your credit card charges in full every month is a sure way to help improve your credit score or maintain a good one.  In fact, nationwide 37.5 percent of all consumers manage to accomplish this feat.  Nevertheless, sooner or later, some rain falls on to everyone’s life and they may miss a payment:  a crisis at work or home can sometimes keep you from getting your bill paying chores done on time.  One way to “insure” that you are never late paying on a credit card is to authorize your card company to automatically deduct the full outstanding balance from your checking account each month.  A one time authorization is required.  Most require a voided check as well to make certain they get the correct bank routing information.  Phone your card company to determine their exact authorization requirements. If this approach seems impossible to you…consider bringing your cards into the auto-deduction fold one at a time.  Of course, this clever strategy only works if you “know” you will have sufficient money in your checking account to cover all your credit card charges.  You can always revoke the automatic deduction if your circumstances change.

Overdue Credit Card Problems

A September 29th  article in the Dallas Morning News highlights a growing trend in credit card usage.  According to the article: “The number of consumers falling delinquent on their credit card bills hit a record high this spring as gasoline prices rose and other pressures stretched household budgets.”  The article goes on to point out that the percentage of credit card accounts that are at least 30 days overdue rose during the April to June quarter to 4.81 percent, the highest level since 1973.  At the same time the delinquency rate on automobile loans from car dealerships rose to 2.08 percent, up from 1.87 percent in the first quarter, while those failing to make a payment on a home equity loan rose to 2.75 percent from 2.61 percent in the first quarter, nearly double the rate in 2002.

The inevitable result of this alarming trend is going to be higher interest rates for all borrowers (to make up for the increases in delinquencies).  As a result, having a good credit score is going to be essential to get a better loan rate whether you are seeking a new mortgage, refinancing a home, or shopping for a new car.  Since your credit score is based on your credit history, it just makes sense to make sure your credit report is clean and accurate BEFORE you seek new credit.  That way you’ll be certain you are not overpaying for your credit purchases.  Seeking the services of a professional credit repair company is the fastest, most effective way to clean up your credit score and be ready if and when you need that new loan or credit line. 

When Bad Credit Happens to Good People

Let’s say you just returned from the new car dealer expecting to get the low interest rate advertised on the radio.  Incredibly the dealer quoted you an interest rate much, much higher.  You figure there is some kind of bait-and-switch scam going on here so you try another dealer and wham – same story.  “What’s this all about ?” you wonder.  You’ve got a  steady job, good income,  a home and lots of credit cards.  Sure you’ve missed some payments, who hasn’t?  The credit card companies just add the interest to your bill, right?

If you’ve recently had this experience or something like it, chances are your credit score has been lowered to the point where new potential creditors are concerned about your ability to pay off new loans?  Even if you’ve made all your payments on time you could still experience trouble getting new credit or a good rate.  At this point,  you basically have three choices: 1) agree to the higher interest rate, 2) figure out what caused your credit score to go down and then take remedial action, or 3) engage a credit repair company to go to battle for you with the credit scoring agencies.  If you have to have the car now, option one may be your only choice.  If you can wait a month or so, the right credit repair company can usually help you get a lower rate.  Otherwise you can plan on spending up to 24 months paying down credit cards, religiously making timely payments on all your loans, not adding new credit, and countless hours trying to find errors and problems in your credit reporting history.  Few people have that kind of time and determination.  For most the best option is to sign up with the right credit repair company.  Here you want to pick one with a great track record of helping good people with bad credit get results.

Credit Repair Question

Mr. Parker:

Why should I employ a credit repair company?  Can’t I contact the credit bureaus directly and repair my credit score myself?

            Misty R.

Misty:

What we bring to the table is our knowledge of Federal Credit Reporting laws, the statues for your specific state, and our knowledge of credit repair procedures.  Of course you could research these laws yourself but you still would not have our experience in understanding which issues are valid and how to best deal with the credit reporting agencies to get results.  In a way we are like lawyers in that we represent you and your interests.  Most people wouldn’t attempt to represent themselves in court because they don’t know the law, proper legal procedures, and what arguments are most likely to persuade the judge or jury.  Having a low credit score means you have already been found guilty to some degree.  Unlike a trial though, we get to revisit the facts of the case and correct or throw out any evidence that was incorrect or incorrectly presented.  I hope this helps you better understand our role and effectiveness.

      Doug Parker,  CEO

      Repair My Credit Now, Inc.

What do people do differently that have the highest credit scores?

The previous blog entry provides lots of clues about getting a high credit score.  Beyond doing these things, high credit scoring individuals do not use credit very often.  When they do they always pay on time and, where credit cards are concerned, they use only a smal part of their credit limit...usually less than 30 percent of available credit.

What can I do to improve my credit score?

The largest component or your credit score is your payment history.  This accounts for 35 percent of your total credit score.  Payment history considers whether you’ve have any delinquencies (failures to pay on time), how recent those delinquencies have occurred and how many times they occurred.  Credit reporting agencies keep 24 months of monthly history month by month.  So the biggest thing you can do help your score is to start making your payments on time and keep making them on time. 

Another 30 percent of your total credit score concerns the amount you owe your creditors – especially credit card debt.  As we discussed in a previous blog, high outstanding balances and the ratio of balances to your credit limit will hurt your score.  So pay down those credit card balances until they are below 30 percent of your available credit.  Getting your outstanding credit card balances below 50 percent will help somewhat.

15 percent of your total credit score concerns how long you’ve had credit.  In general the longer you’ve had credit lines opened the better your score.  Not much you can do here but wait.

New credit applications are another 10 percent of your score:  Here the reporting agencies consider the number of account inquiries (made by potential creditors) and the number of new credit accounts you’ve opened.  So don’t make those instant store credit card applications just so you can get a one-time discount.  They aren’t helping your score. If you already have the cards don’t use them, or use them wisely (see above).

The last 10 percent of your score concerns the number credit lines you have by type:  bank cards, retail, department store cards, installment loans, etc.  People who have lots of credit lines opened by a given type get their credit scores lowered.  So consider closing the ones you don’t use or need. 

What does my credit score number mean?

Suppose you know your FICO (Fair, Issac Company) credit score number but don’t really understand what you’re looking at. (You can learn by credit score by paying a fee to one of the credit reporting services (Experian, Equifax, or Transunion). Your credit score is a critical component of determining whether you will be able to obtain additional credit and what rate of interest or up-front fees you’ll have to pay to get it.  The higher your score the easier you’ll be approved for credit and the lower the interest rate you’ll have to pay.   Credit scores range from the lowest possible value of 350 to the highest of 850, with the national average currently at about 678.  The average FICO score varies from state to state as well.  You can use the above link to check out your state’s average.

Free Credit Reports and Credit Scores

A new law allows consumers to view (online) or receive (by mail) a free annual copy of their credit report from each of the three credit reporting services:  Experian, Equifax, and TransUnion.  This service is available to all but Eastern U.S. states.  After September 1, 2005 the service will be available to Eastern U. S. states as well (See sidebar for a list of Eastern states).  However, if you want to see your credit score you will need to pay the service a fee ranging from $5.95 to $15, depending on whether you request the score at the time you are viewing your annual free report.  It’s $5.95 to $6.95 if you pay during your free viewing session, more if you want to see it at other times.  Go to AnnualCreditReport.com to begin the process of seeing your credit report.  There you will be allowed to request one, two, or all three reports.  The site will take you to each requested reporting service’s site in turn.  There you will be asked to provide enough information so that the reporting agency can be certain that you are who you say you are.  Each service has different information that it uses to verify your identity.  This verification process can be quite tedious.  It’s probably a good idea to look at your report once each year to see that the information is correct.  This process can take an hour or two so make sure you have the time to complete the process before you request your free report.  If you see any errors you can work with a company such as ours (RepairMyCreditNow.com) to get these resolved.